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Ireland boxes clever as BEPS report is launched

The Irish Government hails it as a world first for Ireland’s tax regime. Finance experts say it is a timely response to a long-coming turn on tax among the world’s most powerful governments. We think it’s a sensible measure which should help to restore confidence in Ireland’s taxation policies and bring specific benefits to home-grown entrepreneurs.

The Knowledge Development Box (KDB) is a special tax rate applied to income generated from research and development (R&D) activities in Ireland. The idea was introduced at Budget 2015, when the controversial ‘Double Irish’ loophole was closed. It was subjected to a public consultation earlier this year, and then formally announced in the recent Budget.

The KDB will provide “a 6.25% rate of corporation tax to apply to the profits arising to certain patents and copyrighted software which are the result of qualifying R&D carried out by the company qualifying for the relief”, the Government says. This is half of the normal corporation tax rate in Ireland.

Scrutiny

Ireland was among several countries whose tax moves fell under the scrutiny of the US, the EU and the OECD. They claimed multinationals were avoiding billions in taxes by pushing profits through vague subsidiaries in low-tax regimes – or ‘tax havens’, or relocating their headquartered there, with Barack Obama singling out Ireland for attack. Considering the direct and indirect importance of the multinationals to Ireland’s economy, this is scrutiny the Government would wish to avoid.

The KDB is closely linked with the OECD’s Base Erosion and Profit-Shifting (BEPS) Report, which was released in early October, and approved by G20 finance ministers shortly afterwards. The report focuses on real economic activity, country-by-country reporting and transfer pricing, and aims to ensure that the world’s tax rules regain and retain their thrust in a much-changed and complex business environment.

BEPS “refers to tax planning strategies that exploit … gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid,” the OEDC says.

Tax reform

The timing of the KDB, which has just been published in the Finance Bill, therefore allows the Government to trumpet tax reform to the world, and show its counterparts in major economies that it takes their concerns on tax with deadly seriousness. While the KDB in many ways mirrors patent boxes already in existence in the UK and the Netherlands, the Government claims it is the first one that has been established under the BEPS guidelines.

Indigenous start-ups are likely to benefit most from the move, which takes a “modified nexus approach”. This means that earnings from R&D or intellectual property developed within Ireland will be subject to a tax rate of 6.25%. Ireland’s lead in implementing the new guidelines should play well with their powerful authors, and may even force rival nations to adopt such an approach.

Responsibility for implementing changes prescribed by the BEPS report falls on individual governments. In its continuing efforts to present a cooperative stance and reduce any damage to the country’s reputation, the Government has also laid the foundations for country-by-country reporting and indicated that Ireland would fully engage with the new taxation environment in Europe and beyond.